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I have a finance question for you:
Would you rather pay a large, upfront fee for something, or a smaller annual one?
Your answer, I hope, is 'it depends'.
Because, well, it does.
It depends on a lot of things, but primarily: the two amounts in question, and the length of time over which the annual amount is paid.
I reckon paying $100 upfront for something is meaningfully worse than paying $1 per year, on the reasonable assumption I won't be around in 2120.
Equally, if I have to pay for more than 5 years, I'd take the upfront option if the yearly payment was $20.
In between those two scenarios, though, the numbers get very fuzzy, very quickly.
And a lot of other considerations should be added in, too.
I'd rather pay a gym membership monthly, rather than paying for a couple of years in advance, even at a decent discount.
Why?
Well, the gym might close. I might no longer be able to workout due to illness, injury or relocation. There might be a better gym that opens up down the street after 3 months.
Or, you know, I might not go as often as I should — or I might stop going altogether — however unlikely that seems.
And then there's the discount. If I was offered $10/month or $230 upfront for two years, I'm pretty sure I'm taking the monthly deal.
But if I could join for 2 years for $99?
Well, then I start doing the maths. I only have to go for 10 of the next 24 months to break even. After that, I'm ahead.
At $49 it's probably a steal.
But overall, as I said, 'it depends'.
Which is the first thought that came into my mind when I saw the news that the NSW Government is planning to replace one-off stamp duty, paid when you buy a property, with an annual land tax.
Now, I have no interest in scaring the horses, so lets get a couple of things out of the way:
1. It's just a proposal, for now
2. It's proposed to only apply to future purchases; and
3. The proposal suggests that buyers can choose either option.
In a quote designed to make the proposal clearer, NSW Treasurer Dominic Perrottet said:
"This will be like the Netflix of property tax."
So, is this a case of 'Property Tax and chill'? Or are we being sucked into bingeing on more reality TV than is good for us?
(I say 'we', because this isn't just a NSW issue. You can bet your entire stamp duty bill that other state treasurers are watching this experiment very, very closely.)
I'll be frank: right now, the answer is, as I alluded to above, 'it depends'.
But I do have some concerns.
First, how much is the annual tax likely to be?
We don't yet know if it'll be an attractive option, relative to the current upfront scenario.
Second, what is the impact on homeowners, particularly pensioners and other retirees, who might find themselves 'asset rich, but cash poor'?
Do we face them being thrown out of their own homes? Or the explosion of 'reverse mortgages', allowing the finance industry to get its claws into previously debt-free retirees who feel they have no other option than to either sell up or give in?
Third — and this is my great fear — will the new annual land tax become a tax on innumeracy and human frailty?
Because, let's face it, most of us aren't anywhere near good enough with money.
If you play the lotto, the dogs or the pokies, you're likely to lose. But people do.
If you carry a credit card balance, you're getting screwed. But people do.
If we take away Super, most of us won't save enough for retirement, either.
Put simply, we're not very good, as a species at managing money.
We're even worse at thinking ahead. Making things 'Future Scott's' problems is all too easy for me today.
Future Scott would be much better served if I put down the chocky, and went for a run.
Future Scott would be better off if I didn't buy that new phone, or the new telly.
Future Scott would have been hundreds of thousands of dollars better off if I hadn't bought a new car when I was 25…
You get the idea.
So what are the odds that people are going to make good choices when they have the option of ponying up $50,000 in stamp duty today, or paying $3,000 a year in property tax forever?
"Future Scott (or Future Sally, Future John or Future Samira) be damned", in all probability.
Lastly, you remember the property speculation that, in large part, caused the Global Financial Crisis in the US?
You know one of the reasons we didn't have the same thing here?
Stamp Duty.
Yep, the cost of 'flipping' a house is currently prohibitive, thanks to the lump sum you lose every time you buy.
Now, I can't prove it, but don't you reckon there would have been just a little more housing speculation if it was much, much cheaper to buy and sell?
And, especially given the cost of housing here in Australia, don't you reckon 'more speculation' is the last thing we need?
Me too.
Yes, there are likely benefits to the planned scheme. The list of potential drawbacks, above, isn't supposed to paint the idea as 'all bad'. But you'll get plenty of 'charm offensive' speeches and articles on the positives, so this is my attempt to make sure you're armed with all of the (potential) problems, too.
And now you are. Choose wisely.
Fool on!
